The cable providers who have invested in and implemented TV Everywhere trials deny the allegations that the initiative violates antitrust laws, and instead argue that TV Everywhere benefits consumers by making more content available on the Internet.   While advocates call it “innovative”, antagonists call it “incumbents protecting their turf,” – which as of late will ultimately boil down to a question for the Department of Justice.

Antitrust laws are meant to protect competition in the marketplace, recognizing that competition is necessary to ensure fair pricing and better quality for the consumer.  Therefore, the fundamental question from an antitrust perspective is, will TV Everywhere threaten or hinder competition in the online television content space?  The public interest groups calling for an investigation argue that it most certainly will stifle competition in the emerging market for online television programming.  They go so far as to allege collusion among the major video service providers networks, claiming that the TV Everywhere initiative rests on an illegal “horizontal” agreement among competitors.

In its complaint to the DOJ, Free Press asserts that the TV Everywhere alleged agreements amongst the cable providers are collusive horizontal agreements likely to be found illegal under the applicable per se rules governing antitrust law.  The per se rule applies only to practices that are themselves clearly unreasonable restraints of trade regardless of market facts, such as horizontal collusion, including horizontal price-fixing, market allocation, and certain group boycotts.  Additionally certain tying arrangements are also per se violations.  Antitrust case law has established each such activity as “unreasonable restraints of trade”.

Price Fixing

Price collusion among competitors has been determined by the Supreme Court to be a per se violation of Section 1 of the Sherman Act regardless of the actual impact on the market.  Typically, in order for a court to find per se illegal collusion there must be a “horizontal agreement” in place, i.e., an agreement among competitors.

National Cable and Telecommunications Associations Chief Executive Kyle McSlarrow publicly denounced the anti-competitive allegations in a statement issued in response to the filing of the DOJ complaint.  McSlarrow asserted that TV Everywhere is the result of true market player collaboration rather than collusion.  He defends TV Everywhere noting that antitrust authorities have encouraged collaboration in the past, sometimes even among competitors, for the sake of innovation and market stimulation.  “Distributors do not have the ability to unilaterally decide how content is distributed.  Content owners, through individual business arrangements with a growing array of distributors ultimately make those decisions.  All in all, Free Press and other parties are complaining about decisions content owners make about how their content should be distributed.”

McSlarrow also argued that with respect to the various TV Everywhere initiatives being tested the relationships are purely vertical (i.e., based on arrangements between one content company and one or more individual distributors) and not horizontal (i.e. based on agreements between distributors, one the one hand, and agreements between content owners, on the other hand) in nature.   As he said, “The fact that market participants are experimenting with models in addition to fee- or advertiser-supported models is not a sign of anti-competitive conduct.”

Dividing the Market

Deliberate and strategic division or allocation of customers, territories or portions of the market between competitors, i.e., “market allocation”, has also been deemed a violation of Section 1 of the Sherman Act.  Market allocations are subject to per se illegality findings whether or not price setting is involved, and whether or not the parties involved are actual or potential competitors.  Free Press and other public interest groups assert that the TV Everywhere “horizontal” arrangement amongst the cable providers illegally allocates geographic and product markets.

While the reality is that under the TV Everywhere model, competing distributors allocate markets geographically, that allocation is not a “voluntary” one but rather the result of the fact that each major cable provider has a de-facto “monopoly” in the geographic areas in which they have been granted a franchise to operate.  The cable providers plan to continue, through TV Everywhere, to serve only those consumers within the geographic areas to which they currently provide services, rather than branching out to compete with providers in other areas.  While critics may argue that this is an unlawful “market allocation”, cable providers view this as nothing more than a continuation of servicing their current customer base by including a premium content feature in addition to the services already being provided to such customers.

Tying

Free Press and other public interest groups have also accused the cable providers offering TV Everywhere of unlawful “tying”, which the Supreme Court has held occurs when a seller enjoys a monopolistic position in the market for the tying product and a substantial volume of commerce in the “tied” product is restrained.   Free Press stated that, “by tying online television to incumbent MVPD [multichannel video programming distributors] subscriptions, TV Everywhere is designed to undermine new forms of competition and consumer choice currently emerging over the Internet.”  Free Press, among others, believes that true competitive pressure should require existing cable TV providers to meet consumer demand for online TV, rather than allow them to resist the demand by tying online programming to what is being perceived as “inflated” cable TV subscriptions.

On the other hand, some say that TV Everywhere is not only good for consumers, who can choose to legally access high quality video content they are already paying for on the Internet, but is also good for program distributors because it opens up a gateway for new content that wasn’t previously (legally) available online, and ultimately that it represents a promising initiative for bridging old and new media.

Competition

Public interest groups also claim that TV Everywhere could be a threat to competition for video start-ups such as Vuze, Roku and Hulu.  However, this may not necessarily be a true apples-to-apples comparison since these video start-ups are not traditionally considered direct competitors of major cable operators, nor would it be possible to determine that the success or failure of non-TV Everywhere online television content providers is directly attributable to the business models of the major cable providers.  Ultimately, content providers, without whom both cable providers and on-line video providers wouldn’t have much of a business, still remain free to make their content available wherever they want.  Even before TV Everywhere initiatives were rolled out, those providers sought to distribute their content on competing cable, satellite, telephone and online platforms.  TV Everywhere appears to be an extension and evolution of those existing platform distribution models.

It is unclear at this stage whether or not the assertions made by the public interest groups will gain traction with DOJ or lead to further scrutiny or regulation.  It is clear, however, that the TV Everywhere initiative reflects a “dynamic and rapidly-changing market in which  no one knows the ultimate outcome”.   As the model evolves, it is likely that we will see its impact throughout the legal and regulatory landscape, including antitrust law, policies for an open Internet (i.e., net neutrality), content providers’ and distributors’ rights and interests and demand/consumption of online and traditional television content by consumers.

On March 11, 2010, the Digital HHR team is presenting “TV Everywhere–Is It Everywhere You Want to Be?”, a live, CLE-accredited Webinar exploring the legal and business issues surrounding TV Everywhere, including the antitrust issues we’ve discussed here.  We will also continue to stay abreast of these developments as an on-going effort to provide our clients with guidance to enable them to take advantage of the rapidly-changing environment in which they operate.

• Methodologies to authenticate subscribers and the technological burdens of implementing such authentication methodologies;
• Protection of personally identifiable information (PII) of subscribers and controlling access to such subscriber PII;
• Impact of the FCC’s proposed “net neutrality” rules on TV Everywhere initiatives; and
• Potential business models and revenue opportunities for stakeholders, including revenue streams from enhanced subscription fees, premium advertising fees, etc.

The one-hour Webinar will also feature “live chat” functionality to enable viewers to ask questions and comment on the presentation in real-time. Presentation materials will be available for download.

The Webinar will be held on Thursday, March 11th, 2010 from 12:30 p.m. to 1:30 p.m. EST. To register, click here.

The initiative is, in many ways, the product of a “perfect storm” of the realities, opportunities and challenges facing not just the cable/satellite tv industry and content owners, but the advertising industry and advertisers themselves. Here’s what is at play:

• Cable, satellite and telco TV is one of the few sources of subscription content that people are willing to pay for.

• That fact keeps most video content and programming off the Web as cable networks fight to preserve the 50% of revenue that comes from subscribers. Their fear is that, with content freely available on the Web, many viewers may decide to simply terminate their pay TV service.

• The content owners are often reluctant to put content directly online for fear that the value of their respective offerings to the cable/satellite companies will be diminished, thereby undermining the traditional cable/satellite subscription model.

• Yet the content owners and Web publishers recognize that there are ad dollars to be made by placing more and more content and programming on the Web.

TV Everywhere is based on a fairly simple premise:  since consumers are already paying for the content they are watching at home on their TVs, why not let them watch the same content wherever they have a screen that is web-enabled? 

But even as TV Everywhere seeks to gain traction, and by doing so strengthen the hand of pay TV providers, “Over The Top” (OTT) distributors continue to pull an end around these providers by enabling consumers to watch Internet video content (a sizable portion of which is free or provided at no additional charge) on their TVs.  OTT refers to video being delivered to homes over a broadband network that isn’t owned by the distributor itself.  For example, if you watch Hulu video in your home via a Verizon FiOS broadband connection, Hulu is going “over the top” of Verizon.  Hulu doesn’t own the broadband network, it simply rides on top of the one that’s there, essentially competing with the broadband provider’s own video service. 

Unlike TVE, OTT video services come in several different models from providers as diverse as Apple (Apple TV), Microsoft (Xbox Live), Sony (PlayStation Network), and Netflix.  OTT providers are looking to extend the Web beyond the computer screen and onto TV sets in living rooms using a mix of subscription, pay-per-view and ad-supported models.  

While enabling viewers to watch YouTube videos of cats jumping on trampolines on a giant plasma screen may not be of concern to pay TV providers, giving them the ability to watch movies on-demand and free and premium cable content (the bread and butter content for pay TV providers) through an OTT service surely is cause for alarm.  In what might be a pay TV providers worst nightmare, some OTT services could lead consumers to contemplate ditching their pay TV subscriptions altogether. 

For content owners, both TVE and OTT provide both opportunity and concern.  In the case of TVE, the implementation of authentication technologies–to ensure that only paid-up subscribers have access to video content–is a significant advance in preventing piracy, one of the highest priorities of content owners. In addition, content owners receive payments from pay TV providers, based on revenue those providers receive from their subscribers.  By making pay TV providers’ revenue pie larger, content owners may ultimately receive a larger slice of that revenue. 

However, by merely extending access, TVE may not provide enough of an economic benefit to content owners, even if TVE deals are non-exclusive.  For years those owners have been entering into agreements for the online distribution and syndication of their content, including deals for OTT services.  These agreements provide for a variety of revenue streams, including up-front advances and substantial participation in advertising revenue.  And although one of the future promises of TVE is the ability to serve targeted advertising to viewers–which could conceivably provide higher revenues–it is still too early to determine if that promise can or will be fulfilled. 

The situation is obviously very fluid, with the stakeholders (including pay TV providers, content owners, broadcast and cable networks, hardware and software providers, and yes, consumers) having multiple intersecting and conflicting interests.  Our upcoming webinar will take a closer look at TVE and some of these questions.  We will also keep abreast of developments and undoubtedly provide additional insight here in the future.

*  Kari Hirsch, who recently joined the Digitalhhr team, assisted in the preparation of this post.

This is yet another in a long list of cases brought by former athletes from the NFL, MLB, and NCAA seeking limits on the right to exploit players’ likenesses. In fact, just last year, a number of retired NFL players won a class action lawsuit against the NFL Players Association, arguing that the union conspired with Electronic Arts to use their likenesses in the Madden video game series without proper compensation, in which the retired players earned a $26 million settlement.

This time around, the league itself, not the union, is being sued by retired players who are challenging the exploitation of their images, names and likenesses in connection with the promotion of the league and the packaging, advertising and sales of products distributed by NFL Films–a division of NFL Properties which produces feature films, commercials, television programs, and documentaries on the NFL.

Each side is now preparing to do battle over both the scope (how broad) and term (how long) of the rights the players granted the NFL in the standard form player contracts and the corresponding collective bargaining agreements. The case will no doubt hinge on good old fashioned contract analysis and whether the NFL’s exploitation of the players’ likenesses falls squarely within the four corners of the documents. According to the players’ lawyer, “During [the players’] time in the league the players’ contracts gave the NFL authority to use their names and pictures for publicity and promotion in news, television and motion pictures, but they included no perpetuity clauses.” The players’ attorney also stated that beginning in 1993, the NFL’s collective bargaining agreement with the NFL Players Association altered the standard form player contract to contain broader rights to use the players’ names, images, and likenesses, apparently plugging the loophole.

The court’s contract analysis will have its own share of intricacies. First, the statute of limitations for right of publicity violations and other contract-based claims will bar a considerable amount of the alleged infringements and possibly reduce the amount of the “fair share of the revenue the NFL has earned”, which the players demand in their complaint. Second, the provisions granting the NFL a license to the players’ images, names, and likenesses may not have expired when the individual contracts themselves expired, as the plaintiffs claim, since the license grants incorporated therein may have been perpetual or drafted to survive any termination or expiration of the contract.

The court will also have to address another thorny issue.  Specifically, even if the players granted the NFL a perpetual license to their likenesses, was that grant broad enough to encompass distribution across platforms and media, such as the internet, wireless devices, and other technologies that did not exist at the time the grants were made?  This is an especially tricky issue because the grants were made in connection with what amounts to the players’ employment or services agreements with the league.  

We will keep an eye out for developments in this case which, regardless of its outcome, will likely provide useful and interesting guidance on drafting similar license grants in the future.

While consumer DVRs have been used for years, Cablevision sought to launch a service for the remote storage of shows recorded by consumers.  Cablevision’s argument in favor of such service was that, as long as consumers were still in control of the recording, playback and deletion process, the location of the hard drive on which the content was stored didn’t matter.  Broadcasters disagreed, however, claiming that by archiving and retransmitting the content, Cablevision was engaging in copyright infringement.

A district judge initially agreed with the broadcasters and, in March 2007, entered an injunction preventing Cablevision from rolling out its program.  Cablevision appealed and in August 2008, the Second Circuit reversed the district court ruling in a sweeping opinion.  The circuit court found that, while Cablevision employed a 1.2 second storage buffer, that “embodiment” of the work was only transitory and failed to constitute copyright infringement.  The circuit court also found that Cablevision did not own the copies on its servers, which were controlled by the users and therefore fell within the scope of the fair use doctrine.

The Supreme Court’s denial of cert brings to an end the litigation.  Cablevision announced that it plans on beginning a roll-out by the end of the summer.

At issue is the broadcast “overspill” clause of the 1992 distribution agreement between Univision and Televisa.  Under the agreement, Televisa granted Univision exclusive broadcast rights in the US to certain programming produced by Televisa but the agreement contains an exception to Univision’s exclusivity for any transmission of a program emanating from a television station located in Mexico.  This clause, which is typically included when television rights are licensed on an exclusive basis for a specific territory, is designed to address the issue of broadcast “overspill” resulting from the ability of television signals broadcast from neighboring countries to be received across the border. Televisa contends that under the broadcast “overspill” clause, it may exhibit and distribute its programming on the Internet via servers based in Mexico.   

A decision against Univision could have a significant adverse impact on Univision’s viewership and ratings (and hence its advertising revenues) because Televisa typically broadcasts its shows in Mexico several months before the programs are made available to Univision and other broadcast licensees outside Mexico.  US viewers could potentially watch the extremely popular Televisa soap operas and telenovelas on the Internet six months ahead of when they air on Univision. 

A similar issue is involved in litigation filed in 2007 by the Starz pay TV programming service against Disney.  In the litigation, Starz contends that Disney’s distribution of its films via the Internet through services such as iTunes and Amazon.com violates the exclusive pay television rights granted by Disney to Starz under various pay television license agreements between the two companies.  Starz is also distributing Disney’s films online through its  Starz On Demand and Vongo services.

The Univision/Televisa litigation and the Starz/Disney litigation illustrate the problems that can be created by new media applications under agreements purporting to license television rights on an exclusive basis.  These problems can be particularly acute under older “legacy” agreements where key definitions and terms used to describe the licensee’s exclusivity may have been drafted without a view to potential future exploitation via the Internet and other new media distribution platforms. 

For example, a random Pay TV agreement from 1994 I just pulled off my shelf defines “Pay Television” as “the encrypted transmission and/or retransmission from a distance (i.e., other than from the premises where received) and intended for receipt on a television monitor or other comparable non-public video display by broadcast, microwave, satellite, optical fiber, telephone cable and/or coaxial cable of synchronized video and audio signals both of which are received upon payment by a Subscriber of a periodically charged or supplemental subscription and/or access fee.”  This definition would appear to encompass not only traditional pay television rights typically granted to HBO, Showtime and Starz but also digital video-on-demand rights granted to various Internet distribution services such as Amazon.com and BestBuy.com. 

Obviously, in licensing rights for distribution via the Web and other new media platforms, such as mobile and handheld devices, content owners need to examine pre-existing, legacy television distribution deals to ensure that those rights are available and are not encompassed within the grants of exclusive television rights.  Also, practitioners on both sides of new television deals need to take particular care in defining the scope of the licensee’s exclusivity to avoid the types of problems that have surfaced in the Starz and Univision cases.

“TV Everywhere”, the brainchild of Jeff Bewkes, CEO of Time Warner, the largest owner of cable networks, including TNT, Cartoon Network, CNN and HBO, would put all cable programming on the Web in places such as Hulu, MySpace and Yahoo TV.  The catch—viewers will have to prove that they already pay for the content through a TV subscription with a cable, satellite or telephone company.  And like the dry cleaner, no ticket, no shirt (or, in this case, show).

The initiative is, in many ways, the product of a “perfect storm” of the realities, opportunities and challenges facing not just the cable/satellite/telco industry and content owners, but the advertising industry and advertisers themselves.  Here’s what is at play:

• Cable, satellite and telco TV is one of the few sources of subscription content that people are willing to pay for.
• That fact keeps most video content and programming off the Web as cable networks fight to preserve the 50% of revenue that comes from subscribers.  Their fear is that, with content freely available on the Web, many viewers may decide to simply terminate their pay TV service.
• The content owners and networks are often reluctant to put content directly online for fear that the cable companies will not want to pay top dollar to the media companies who are, in effect, undermining the cable subscription model.
• Yet the content owners and Web publishers recognize that there are ad dollars to be made by placing more and more content and programming on the Web.

TV Everywhere is intended to address all of these points.  In theory, pay TV subscribers would have online (and perhaps mobile) access to all of the TV programming included in their pay TV package.  You would log in, provide information regarding your pay TV subscription (perhaps via an “unlock” key you get from your pay TV company) and can have access to a robust library of programming.

Viacom and ESPN, two of the largest programmers, appear to be open to such an initiative.  According to the report in MediaDailyNews, Viacom is working with cable operators to develop an authentication process.  ESPN is also evaluating certain technology that might be deployed.  And Time Warner Cable has been testing a system in Wisconsin which enables HBO subscribers to watch shows online.

New research seems to support claims of the cable industry that making cable programming available to subscribers regardless of which of the “three screens” viewed—TV, PC and mobile—would lead to increased market demand.  The Diffusion Group found that 16% if cable subscribers who spend more than $100 per month for TV service would spend an additional $20 per month to deliver that same content to their PCs.  (No word from Diffusion about how the other 84% of subscribers feel.)  The research revealed that the percentage of cable subscribers willing to pay more for additional access on other screens increased as the added cost for the access decreased.

With broad participation by pay TV providers and Web sites offering the video content (presumably any site with an agreement with the media content providers), this initiative could be entirely system and provider agnostic.  The clear advantage to subscribers is added access to video content that they already pay for.  For the Web sites, perhaps an opportunity to provide targeted advertising—after all, the log-in process could provide information about the subscriber.

However, the hurdles are substantial.  Put aside for a minute the enormous endeavor needed to develop and implement a system that could process and authenticate information from millions of pay TV subscribers with hundreds of plans offered from dozens of providers that would need to be integrated onto perhaps thousands of platforms across the Web.  (Now that I’ve written that sentence, it seems absurd to “put it aside.”)  But the cooperation needed by all of the stakeholders—pay TV providers, broadband service providers, Web site operators—is substantial, to say the least.  Reconciling issues such as sharing consumer information will be tremendously difficult, both from the consumer facing (privacy policies, anyone?) and business intelligence standpoints.  Certain legal restrictions on the use and/or disclosure of such information may also apply.

Moreover, what type of information would be provided to the Web site operators?  They would likely want access to subscriber information in order to sell targeted advertising, an interest shared by the programming providers.  However, will pay TV providers want to share such information—giving the Web sites a revenue advantage—without participating?

Lastly, are consumers willing to go along here, undertaking yet another login and authentication process, exposing themselves to yet more advertising and eroding privacy a bit further, all to watch more TV outside of the comfort of their own living rooms?

We will watch developments here closely as these are some BIG questions.

E-Alert: Impact of the Writer’s Guild

In the coming days, the 10,500 striking members of The Writers Guild of America are expected to ratify a new, three-year agreement, which secures the writers a share of the digital media market by way of compensation for television programming and films delivered via the Internet and new media distribution platforms, including those delivered on an ad-supported basis. The proposed deal recognizes that the Internet is a primary means for content creation and delivery and firmly establishes the union’s jurisdiction over programming created for and distributed via new media outlets.

The anticipated compensation formula provides for the writers to receive a flat fee for programs streamed for the first two years of the term of the agreement. In the third year, the writers will begin to receive a percentage of the distributors’ gross revenue. The proposed agreement also provides for compensation for programming written specifically for new media platforms that are distributed and syndicated later as a television series, special or motion picture. The new rate at which writers will be compensated for electronic distribution of movies and television shows is speculated to be nearly double the rate historically paid by distributors for DVDs.

The arrangement raises complex and daunting questions for content producers, providers, distributors, aggregators and syndicators operating in the new media space. These include:

• How will networks and studios take these additional fees into account in determining the license fee that distributors will pay or share of advertising revenue they will receive?

• Will the writers’ success in securing this compensation formula have a precendential effect on upcoming negotiations of the Screen Actors Guild contract?

• How will the well-established economic model for video downloads (i.e., fixed price per download) be impacted if content providers are compelled to evaluate download-to-own and electronic-sell-through pricing based on the popularity of a particular show?

• Will the distribution of promotional content trigger the payment of residuals? What distinguishes “promotional” programming from “commercial” programming for this purpose?

• What is the scope of the revenue model contemplated and how far do the writers’ residuals extend? Content providers will need to carefully structure their transactions with distribution partners to exclude consideration received that is not directly attributable to the programming that is ultimately distributed (e.g., ancillary on-air advertising buys, run of site banner advertising inventory appearing on pages where such programming is streamed via an embeddable/viral media player, etc.).

• How will residuals based on “gross revenues” be calculated? What exactly does “gross revenues” mean? Both content providers and content aggregators/distributors will need to be extremely vigilant in delineating applicable deductions for any royalty payments or revenue shares due in connection with the distribution of programming.

The reality is that many content distribution and syndication deals are multi-faceted and often involve multiple forms of distribution, equity components and revenue streams. Now, more than ever, it has become increasingly important for studios, producers, content providers, distributors and aggregators alike to seek competent legal counsel to mitigate the legal, economic and operational risks involved when contemplating the structure of these transactions.

We are here to help. We have extensive experience in assisting our clients with the development of new business models and the negotiation of cutting edge transactions that facilitate the exploitation of their programming, products and services on all new media platforms, and will continue to stay apprised of how the WGA agreement (once ratified), and other related industry developments, challenge and create obstacles for our clients to overcome.

Contact Dan Schnapp at schnapp@hugheshubbard.com or (212) 837-6258 or Hali Resnick at resnickh@hugheshubbard.com or (212) 837-6058 of our New Media, Entertainment and Technology practice group to find out how we can help you.